Despite macroeconomic challenges, the tech industry is experiencing solid growth due to the broad adoption of technology, rising investments in digitization, and the uptake of emerging technologies. All these factors are driving the demand for advanced hardware solutions.
Amid this backdrop, it could be wise to invest in fundamentally strong tech services stocks: Science Applications International Corporation (SAIC), Dropbox, Inc. (DBX), and GigaCloud Technology Inc. (GCT), given their high profitability.
Before diving deeper into the fundamentals of these stocks, let’s discuss why the tech services industry is well-positioned to grow.
Global tech spending is expected to keep growing despite the difficult economic environment due to the rapid advancements in digital technology. Organizations in various sectors adopt digitalization and advanced tech for productivity, efficiency, and cost reduction, fostering innovation. Gartner forecasts that worldwide IT spending will reach $5.10 trillion in 2024, marking an 8% year-over-year increase.
The global increase in data generation is driving a growing demand for IT services and platforms for data analysis. According to a Statista report, U.S. businesses are expected to generate 224.08 billion gigabytes of data in 2023, up from 178.21 billion gigabytes in 2022.
Furthermore, the industry's prospects are bolstered by the rising adoption of cutting-edge technologies, including AI, the Internet of Things (IoT), metaverse, machine learning (ML), blockchain, 5G, and augmented reality (AR), by various organizations.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Technology - Services picks, beginning with the third choice.
Stock #3: Science Applications International Corporation (SAIC)
SAIC provides technical, engineering, and enterprise Information Technology (IT) services primarily in the United States.
On September 11, SAIC announced a $574 million contract with the U.S. Space Force for Ground Based Radar Maintenance and Sustainment Services (GMASS). The contract covers the maintenance and modification of Upgraded Early Warning Radars (UEWR) and the Perimeter Acquisition Radar Attack Characterization System (PARCS) radars.
SAIC will use an integrated roadmap to enhance missile warning and space domain awareness capabilities for the Space Force. L3Harris is named as an exclusive team member on the contract, strengthening SAIC's focus on space-related growth.
In terms of the trailing-12-month levered FCF margin, SAIC’s 9.02% is 59.2% higher than the 5.67% industry average. Likewise, its 28.63% trailing-12-month Return on Common Equity is 114.1% higher than the industry average of 13.37%. Furthermore, the stock’s 1.36x trailing-12-month asset turnover ratio is 70.9% higher than the industry average of 0.79x.
For the fiscal second quarter that ended August 4, 2023, SAIC’s revenues stood at $1.78 billion. Its adjusted operating income increased 7.2% year-over-year to $134 million. Its net income rose 233.8% year-over-year to $247 million. Its adjusted EBITDA increased 4.8% year-over-year to $174 million. Also, EPS came in at $2.05, representing an increase of 17.1% year-over-year.
Street expects SAIC’s EPS and revenue for fiscal 2025 to increase 3.5% and 0.1% year-over-year to $7.66 and $7.24 billion, respectively. It surpassed the consensus EPS estimates in each of the four trailing quarters. Over the past six months, the stock has gained 5% to close the last trading session at $107.14.
SAIC’s POWR Ratings reflect strong prospects. It has an overall rating of B, translating to a Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #13 out of 74 stocks in the Technology - Services. It has a B grade for Value and Momentum. Click here to see SAIC’s ratings for Growth, Stability, Sentiment, and Quality.
Stock #2: Dropbox, Inc. (DBX)
DBX provides a content collaboration platform worldwide. The company's platform allows individuals, families, teams, and organizations to collaborate and sign up for free through its website or app, as well as upgrade to a paid subscription plan for premium features.
On October 10, DBX announced a range of updates and innovations, including AI-powered products, a web revamp, a 'Dropbox Studio' video tool, and new workflow plans.
The company introduced Aug X Labs and LlamaIndex as the first partners of 'Dropbox Ventures' for AI-powered startups. These changes target improved knowledge work, reduced distractions, and enhanced productivity through generative AI.
Additionally, DBX launched a new subscription plans, such as ‘Dropbox Essentials’, Business, and Business Plus, to help users manage their content more efficiently.
In terms of the trailing-12-month levered FCF margin, DBX’s 32.63% is 342.1% higher than the 7.38% industry average. Likewise, its 14.73% trailing-12-month EBIT margin is 199.9% higher than the 4.91% industry average. Additionally, its 12.30% trailing-12-month Return on Total Capital is 397.8% higher than the 2.47% industry average.
For the second quarter that ended June 30, 2023, DBX’s revenue increased 8.7% year-over-year to $622.50 million. Its non-GAAP gross profit rose 8.3% year-over-year to $515.19 million. Likewise, the company’s income from operations rose 16.5% from the prior year’s quarter to $213.10 million.
In addition, the company’s non-GAAP net income and non-GAAP net income per share increased 26% and 34.2% year-over-year to $174 million and $0.51, respectively.
Analysts expect DELL’s EPS and revenue for the quarter ended September 30, 2023, to increase 14.1% and 6.3% year-over-year to $0.49 and $628.26 million, respectively. It surpassed Street EPS estimates in each of the four trailing quarters. Over the past six months, the stock has gained 28.4% to close the last trading session at $26.11.
It’s no surprise that DBX has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has an A grade for Quality and a B for Value. Within the same industry, it is ranked #8. Beyond what we stated above, we also have given DBX grades for Growth, Momentum, Stability, and Sentiment. Get all DBX ratings here.
Stock #1: GigaCloud Technology Inc. (GCT)
GCT provides end-to-end B2B e-commerce solutions for large parcel merchandise. Its marketplace connects manufacturers primarily in Asia with resellers in the United States, Asia, and Europe to execute cross-border transactions across furniture, home appliances, fitness equipment, and other large parcel categories.
On September 22, GCT expanded its warehouse network by leasing three new facilities in the United States and Germany. These additions are expected to provide approximately 894,700 square feet of space, supporting GCT's global B2B marketplace for large parcel merchandise across North America, Europe, and Asia.
Iman Schrock, President at GCT, predicted that the three new warehouses, expected to be fully operational by the end of October, will meet the needs of customers in the United States and support the expansion of the company's footprint in Europe.
On September 12, GCT announced an agreement to acquire Noble House Home Furnishings' assets for $85 million in connection with Noble House's Chapter 11 bankruptcy. The agreement is subject to closing conditions and potential higher offers during an auction process.
In terms of the trailing-12-month EBIT margin, GCT’s 11.33% is 55.8% higher than the 7.36% industry average. Its 8.88% trailing-12-month net income margin is 102% higher than the 4.40% industry average. Likewise, the stock’s 15.91% trailing-12-month levered FCF margin is 210.9% higher than the 5.12% industry average.
GCT’s total revenues for the second quarter ended June 30, 2023, increased 23.5% year-over-year to $153.10 million. The company’s adjusted EBITDA increased 219.3% from the prior-year period to $24.90 million. In addition, its net income increased 201.5% year-over-year to $18.40 million.
For the quarter ended September 30, 2023, GCT’s EPS is expected to increase significantly year-over-year to $0.36. Its revenue for the same quarter is expected to increase 27.6% year-over-year to $163.35 million. Over the past year, the stock has gained 82.9% to close the last trading session at $8.89.
GCT’s strong prospects are reflected in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has an A grade for Value and Quality and a B for Growth and Sentiment. It is ranked #4 in the same industry. Click here to see GCT’s Momentum and Stability ratings.
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DBX shares were trading at $26.37 per share on Tuesday afternoon, up $0.26 (+1.00%). Year-to-date, DBX has gained 17.83%, versus a 10.46% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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